Downtown office vacancy lowest since end of 2009

(Crain’s) — The downtown office market is continuing its comeback, as prime spaces are becoming more scarce and more pricey.

The direct vacancy rate for downtown office space fell to 14.5% in the second quarter from 14.9% in the first quarter, according to a report by CB Richard Ellis Inc. The vacancy rate has dropped for four straight quarters from where it stood a year ago, 15.2%, and is at its lowest level since the end of 2009.

Net absorption, a key demand gauge that measures the change in the amount of leased and occupied space compared with the prior period, was positive for a fourth straight quarter, according to the report. Downtown notched 549,090 square feet in net absorption, the most since the third quarter of 2008 — meaning demand is at its most robust since the recession.

“We feel like we are making the turn after having been down such a long, hard road,” says John Dempsey, a senior vice-president with CB Richard Ellis in Chicago who represents office building owners. “When you have 550,000 square feet (of net absorption) in a quarter, that’s a lot. I feel good about this.”

Demand has been driven by firms expanding, most notably the Chicago-based online coupon company Groupon Inc., and companies moving offices to the city, such as United Airlines and the tech firm Ifbyphone Inc., which is moving from Skokie, Mr. Dempsey says.

Yet one of the biggest leases of the quarter, consulting firm McKinsey & Co.’s plan to move to about 100,000 square feet at 300 E. Randolph St., illustrates just how challenged the recovery will be for downtown landlords. McKinsey is leaving behind about 150,000 square feet at Chase Tower, 21 W. Clark St.

A McKinsey spokeswoman declines to comment on the move, but real estate sources speculate that McKinsey may have fewer staffers than it did before the recession, that more of its employees are working remotely and that its new office can accommodate more workers in smaller spaces.

In addition to those dynamics, affecting scads of companies, businesses also remain reticent to take on expansion space and are focused on trying to do more with less space, says Melissa Copley, managing partner with the Chicago office of Mohr Partners, a Dallas-based firm that specializes in representing office tenants.

“The overall trend of business is still a downward pressure on demand,” Ms. Copley says.

The best-performing properties downtown in the second quarter, continuing a trend, were so-called Class A buildings, the newest towers in the best locations.

Direct vacancy in the Class A market plunged to 13.2% from 14.1% in the first quarter. The Class B vacancy rate, meanwhile, edged up to 15.3% from 15.2% in the first quarter, while Class C vacancies dipped to 15.4% from 15.7%.

Mr. Dempsey says one of the tightest parts of the market is big blocks of contiguous space in Class A buildings, a fact near and dear to the handful of developers vying to build the city’s next office tower. Mr. Dempsey says in the Central and West Loop there are just two Class A buildings with 100,000 square feet or more of contiguous space: Willis Tower and 500 W. Monroe St.

While CB Richard Ellis doesn’t track actual rental rates, asking rents for Class A buildings are now $38.27 per square foot, up $1.24 from a year ago. And the positive trend in absorption makes Mr. Dempsey believe many Class A landlords are starting to get those asking rates.

“Before I would have said no, when absorption was flat,” Mr. Dempsey says. “Are they getting it now? Yeah, I think so.”

Notable deals in the quarter included:

• Banking giant Wells Fargo & Co. leased 293,000 square feet at 10 S. Wacker Drive, consolidating five downtown offices in a deal where the San Francisco-based bank will essentially keep the same amount of space.

• Groupon more than doubled its headquarters space at 600 W. Chicago Ave. by agreeing to sublease 222,016 square feet from Bankers Life & Casualty Co. The insurance company, in turn, leased 134,724 square feet at 111 E. Wacker Drive in the East Loop.

• Interpublic Group of Cos., the New York-based advertising and marketing giant, leased about 140,000 square feet at the John Hancock Center, 875 N. Michigan Ave., for two of its key public-relations agencies: GolinHarris and Weber Shandwick, which will move from roughly the same amount of space.

• McKinsey & Co. leased about 100,000 square feet, three floors, in the recently expanded Blue Cross & Blue Shield Building at 300 E. Randolph St. in the East Loop. McKinsey is leaving about 150,000 square feet at Chase Tower, 21 S. Clark St., in the Central Loop.